A Buy-Side Guide to Regulatory and Transactional Issues Related To Derivatives and Repurchase Agreements

SEC Requests Comment on Bitcoin Futures ETFs

On March 23, 2018, the U.S. Securities and Exchange Commission (“SEC”) issued an order instituting proceedings to determine whether it will approve or disapprove a proposal for Bitcoin futures exchange-traded funds (“ETFs”) (the “Order”). In December 2017, NYSE Arca, Inc. filed a rule change proposal to allow for the creation of ETFs that invest in Bitcoin futures contracts and potentially other Bitcoin related investments. In January 2018, the SEC extended its review of the proposal, and with the Order, it now has instituted formal review proceedings and is seeking public comment. Relatedly in January 2018, the director of the SEC’s Division of Investment Management, Dalia Blass, requested that already-proposed Bitcoin futures ETFs withdraw their applications and outlined a series of concerns she had for such products, including valuation, access to information, and liquidity. The SEC’s March 23 Order institutes a new period review into such products and requests comments from the public that focus on twelve areas of interest for the SEC.

The subjects of interest include issues relating to the Bitcoin futures ETFs’ investment practices, as well as concerns related to the underlying Bitcoin and Bitcoin futures markets and how such markets may in turn affect ETFs that invest in Bitcoin futures. For instance, the SEC requests comments on how the ETFs’ investment adviser will select the appropriate Bitcoin futures contracts as well as how it will navigate the respective terms of each contract from the different futures exchanges.

In addition, the SEC requests comments on whether the ETFs will have enough information to be able to adequately value the ETFs’ assets. The SEC also focuses many of its concerns around the potential for manipulation of the underlying Bitcoin markets and what, if any, such potential could have on the ETFs’ net asset value (“NAV”). Finally, the SEC asks for comments on liquidity issues, and whether the relatively high margin requirements for bitcoin futures contracts may present liquidity issues for the Bitcoin futures ETFs to meet redemption requests.

Commenters will have until April 19, 2018 to submit comments. Those with rebuttals to the comments will have until May 3, 2018 to submit rebuttals.

P.S. On April 5, 2018, the SEC published a second order instituting proceedings to determine whether it will approve or disapprove another proposal for Bitcoin futures ETFs (the “Cboe Order”). The Cboe Order relates to a rule change proposal by Cboe BZX Exchange, Inc. that would allow for the creation of ETFs that invest in Bitcoin futures contracts. The Cboe Order asks for comments on many of the same issues as the Order such as manipulation of underlying Bitcoin markets and the effect that may have on the ETFs’ NAV, valuation, and liquidity. Like the Order, the Cboe Order will be open for public comment. Commenters will have until May 1, 2018 to submit comments. Those with rebuttals to the comments will have until May 15, 2018 to submit rebuttals.

P.P.S. On April 23, 2018, the SEC published a third order instituting proceedings to determine whether it will approve or disapprove another proposal for Bitcoin futures ETFs (the “Direxion NYSE Arca Order”). The Direxion NYSE Arca Order relates to a rule change proposal by NYSE Arca, Inc. that would allow for the creation of ETFs that invest in Bitcoin futures contracts. The Direxion NYSE Arca Order asks for comments on many of the same issues as the Order and the Cboe Order such as manipulation of underlying Bitcoin markets and the effect that may have on the ETFs’ NAV, valuation, and liquidity. Because of the nature of the funds in the Direxion NYSE Arca Order, it also asks how, if at all, would leveraged funds affect the underlying Bitcoin markets in a way that differs from a non-leveraged Bitcoin futures ETF. Like the two previous orders, the Direxion NYSE Arca Order will be open for public comment. Commenters will have until May 18, 2018 to submit comments. Those with rebuttals to the comments will have until June 1, 2018 to submit rebuttals.

P.P.P.S. As we have previously discussed, the SEC instituted proceedings on March 23, 2018 to determine whether it will approve or disapprove a proposal by NYSE Arca on behalf of ProShares Bitcoin ETF and ProShares Short Bitcoin ETF (see our discussion of the Order above). On June 15, 2018 the SEC extended its period of review for the Order (the “Extension”). The existing period of review was set to expire on June 24, 2018; however, under the Extension, the SEC has now extended its period of review by an additional 60 days until August 23, 2018. The SEC must now either approve or disapprove the proposed rule change by this new deadline.

P.P.P.P.S. Yet again, the SEC instituted proceedings on April 5, 2018 to determine whether it will approve or disapprove a proposal by Cboe BZX Exchange on behalf of GraniteShares Bitcoin ETF and GraniteShares Short Bitcoin ETF (see our discussion of the Cboe Order above). On June 28, 2018 the SEC extended its period of review for the Cboe Order (the “Cboe Extension”). The existing period of review was set to expire on July 17, 2018; however, under the Cboe Extension, the SEC has now extended its period of review by an additional 60 days until September 15, 2018. The SEC must now either approve or disapprove the proposed rule change by this new deadline.